Bulls Step Aside

It has been a while since we have had a late-day selloff but poor economic news and chatter about the Fed "tapering" finally pushed the bulls aside for a little while. Downside has been so rare lately that the relatively minor pullback felt worse than it looked. In the bigger scheme of things, it hardly was a blip on the screen but it was refreshing to finally break the pattern of unending upside.

This is just the fourth down day for the S&P 500 since April 18 so it really doesn't do anything to damage the uptrend, but the bears are so desperate for anything they are going to seize on this and make is sound like more than it really was.

I view a day like this as more of a positive than a negative. It is what happens in normal markets and allows stocks to consolidate and set up again. Folks need a reason to take profits and a down day is always a good excuse.

It isn't a bad idea to tighten stops, especially if you have profits to protect. I wouldn't be in any hurry to join the top-callers after just one day of weakness but it never hurts to take gains and look for better entry points.

Bears will need downside follow-through if they are going to be taken seriously, but that has only happened once in the last two months and set the stage for the huge run we've just had.

Have a good evening. I'll see you tomorrow.

May 16, 2013 | 1:53 PM EDT

Bad News Really Doesn't Matter

Not until the market decides it matters.

The easiest thing in the world to do right now is come up with reasons why this market will pull back. We all know it is technically extended, the recent economic news has not been very good and some of the action even been a bit frothy lately. If is painfully easy to make a bearish argument but one lesson I've learned in the market is that negatives don't matter until the market decides that they matter. That is why I constantly talk about watching the price action and letting it guide you.

The media likes to make it sound like there is a very clear cause-and-effect relationship between news and the market. Most headlines about the market are produced by finding a news event that fits with whatever the price action happens to be that day. If we are up, the writers find something positive on the newswire to justify the action and vice versa if we are down.

The market drives the news rather than the other way around. You can bet that as soon as we see weak action there will be a slew of stories about how the economy is struggling and there is a long list of concerns. Since the market is holding up, most of the media focuses on positives such as liquidity.

It's a tautology, but bad news really doesn't matter until it matters. Once the market decides it is important, that is the time to start worrying about it. All the bearish pundits will start to say, "I told you so" but most will be buried far in the red due to poor timing -- which they will never admit.

The market is a bit sluggish this afternoon but still holding up overall. Breadth is slightly negative again and has been a non-confirmation of the recent action, but it is awfully tough to count out those dip buyers until they fumble at the close a couple of times.

May 16, 2013 | 10:25 AM EDT

Can't Shake the Economic Data

The Philly Fed report gave the sellers justification to lock in gains.

The dip buyers are trying but they can't shake the poor economic data. The market bounced back from the poor weekly claims and weak housing reports but the Philly Fed report is giving the sellers justification to lock in gains.

The irony, of course, is that the bulls will spin the poor economic reports positive as it means more support from the Fed and other central banks. At some point, there will be bad news and with the market so extended we may actually see selling -- but this is not a market worried about big-picture negatives as long as there is endless cheap cash.

Downside momentum is picking up. The first key level of support will be yesterday's low at 1661 of the S&P 500. If we take that out, we'll start seeing more serious talk of a top.

I'm playing defense and not letting positions slip. My inclination is to err on the side of selling as I can always rebuy when things improve. Himax (HIMX) is probably the best-acting stock on my screen and I'm watching Eagle Bulk Shipping (EGLE) for momentum action. SunPower (SPWR) is pulling back but I don't think that one is done yet.

May 16, 2013 | 8:18 AM EDT

The Market Makes No Sense at All

But our job is to deal with whatever the market dishes out.

There's an idea that hell is other people. My idea is that it might be repetition. --Stephen King

Almost everyone is surprised by the continued strength of this market. Many have resigned themselves to the fact that it seems to be going up forever and are riding the wave, but for others this action confirms what they have thought for years: The market no longer makes any sense at all. Even casual market observers wonder why the market can act as if we are in the midst of a huge economic boom when all the evidence in the real economy is mediocre.

The answer to that conundrum is cheap money that needs a place to go. That is the easy explanation for the way this market action but even if you understand it, it is not that easy to grasp. Do investors no longer care about all the other things that used to drive the market up and down? Are human emotions irrelevant now as the supercomputers are fed endless amounts of cash to deploy?

From a trading standpoint, one of the most satisfying aspects of the job is maneuvering ups and downs, fear and greed, rallies and downtrends, but those things just aren't happening like they used to. The primary goal of traders now is to always been fully invested so they can keep up with the endless upside.

It is very easy to complain about this manipulated market and many traders have just given up trading because it is so bad, but our job is to deal with whatever the market dishes out. Often, we prefer something other than what is being offered by the market beast, but our job isn't to fight it but to accept it and adapt.

The only approach that is working now is to embrace momentum. We keep hearing from skeptics that this market can't be trusted but they have been wrong about that all year. What has worked better than anything is to stay with the price action and not try to be clever and anticipate when it might end.

For many this mindless bullishness is very tiring. They are itching to make some moves and to find some new trades that will help them outperform the market. One of the biggest problems trades face in this sort of environment is that it is much harder to outperform. Traders tend to deliver superior performance when the market had downside moves. The whole advantage of trading is that you are out of the way when the market weakens. If it never weakens, you never have the chance to outperform.

Once again, the action is starting as it has so often, with very slight negative action. The pattern lately is for buyers to step in once it becomes clear that the bears are incapable of pressuring this market. We gain strength through the day as more money is sucked in from the sidelines and usually we have a buy program or two to help goose us further. Market players shake their heads in wonderment and the trend continues.